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APPENDIX VII
Solutions to selected questions and problems This Appendix provides suggested solutions to those end-of-chapter numerical questions and problems not marked with an asterisk*. Answers to questions and problems marked * are given in the Lecturer’s Guide. Answers to discussion questions, essays and reports questions can be found by reading the text.
Chapter 1 No numerical questions; answers to all questions may be found by reading the text.
Chapter 2 1
Proast plc
a
Project A Point in time (yearly intervals)
Project B
Cash flow
Discount factor
Discounted cash flow
Cash flow
Discount factor
Discounted cash flow
0
−120
1.0
−120.00
−120
1.0
−120.00
1
60
0.8696
52.176
15
0.8696
13.044
2
45
0.7561
34.025
45
0.7561
34.025
3
42
0.6575
27.615
55
0.6575
36.163
4
18
0.5718
10.292
60
0.5718
34.308
NPV
4,108
NPV
£4,108
−2.460 −£2,460
Advice: Accept project A and reject project B, because A generates a return greater than that required by the firm on projects of this risk class, but B does not. b
The figure of £4,108 for the NPV of project A can be interpreted as the surplus (in present value terms) above and beyond the required 15 per cent return. Therefore, Proast would be prepared to put up to £120,000 + £4,108 into this project at time zero, because it could thereby obtain the required rate of return of 15 per cent. If Proast put in any more than this, it would generate less than the opportunity cost of the finance providers. Likewise, the maximum cash outflow at time zero (0) for project B which permits the generation of a 15 per cent return is £120,000 − £2,460 = £117,540.
1 © Pearson Education Limited 2013
Full file at https://testbankuniv.eu/Corporate-Financial-Management-5th-Edition-Glen-Arnold-Solutions-Manual